Pro-Dex Should Have Another Good Year

Pro-Dex (PDEX) appreciated 93% in 2016 and I think they’ll have another good year in 2017 (though not as good as 2016). In February 2016, Nate Tobik published a PDEX write-up of mine in his Oddball Stocks Newsletter. While the stock has advanced faster than expected, the thesis hasn’t really changed so I’ve copied the entire write-up below. There are a few notable updates from the past ten months:

  1. Their new #1 customer (referred to as project #1 in my write-up) signed a $24 million purchase order to be split between 2017 and 2018. Quite significant for a company that did $13.4 million in sales in 2015. This will be the catalyst for quarterly sales to ramp from the current run-rate of ~$5.3M up to $7M+ in 3Q17 (which ends March 31, 2017).
  2. Their acquisitions haven’t gone as smooth as they hoped so they stopped M&A for the time being. With that being said, each segment is trending in the right direction. In the most recent quarter, the three small segments (ESD, Fineline Molds, OMS) made money for the first time. These had previously been dragging company results down. Margins in the core Pro-Dex business have also been trending up as they continue to work through some manufacturing inefficiencies discussed below.
  3. Their production facility is only at 40-50% capacity so there’s a long runway for growth before major capex expansion is needed.
  4. There are a couple potential new projects in various stages. As you can see below in my write-up, management is pretty tight-lipped on how large the projects they’re working on could be. This means estimating future revenue requires a lot of educated guessing. Suffice to say, there should be one or two new product launches in 2017 and I expect them each to be worth a couple million per year in revenue.
  5. They’ve continued to repurchase shares.

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Fogo de Chao Is Looking Tasty

A quick housekeeping note first. I recently moved from Cincinnati to Austin, TX which explains my blackout period of blogging. I was busy moving and getting settled in, but I’m finally back to a normal life. Blog posts will be more frequent now. If you happen to live in Austin, shoot me an email! Would love to meet some local investors.

Onto more important stuff. Fogo de Chao (FOGO, $10.52) is a Brazilian steakhouse with 31 locations in the US and 10 in Brazil (plus 1 junior venture in Mexico). I bet some of you are already turned off just because Fogo is a restaurant. I was too. Restaurant concepts come and go and they’re dependent on consumer tastes which can quickly change. Lots of good restaurants open, have a few years of success, and then slowly die as the initial luster wears off and people move on to the hot new concept down the street. I don’t think I’ve ever invested in a public restaurant group before, so hopefully the fact that I like Fogo so much says something (probably that I’m about to learn why restaurants are best avoided).
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Armanino Foods (AMNF)

Armanino Foods (AMNF, $2.17) sells frozen pestos, sauces, stuffed pasta and cooked meat products. The current CEO, Edmond Pera, took over in February 2009. Since then, revenue has nearly doubled, share count has decreased 8%, and gross margins, operating margins and returns on capital have all expanded. All this fueled a stock price that has compounded at a rate of 31% per year since 2009. Not surprisingly, the small cap investment community took notice to these impressive results. Over the past few years, Armanino has been written up on Value Investor’s Club, otcadventures, multiple times on Seeking Alpha, and it has its own thread on Corner of Berkshire and Fairfax. Because these extensive write-ups already exist, I’m going to give a quick business and industry overview and then focus on why I like AMNF as an investment right now. This isn’t a lengthy write-up, but that’s because the thesis is pretty simple. Armanino is probably my favorite idea in terms of risk/reward that I’ve discovered this year.
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Noble Roman’s Short-Term Play

This is going to be a quick post on a short-term investment I made. It’s already partially played out (quicker than I expected), but I think there’s more to go. Hopefully some readers can make a quick buck here. Privet Fund acquired just under three million shares (14%) of Noble Roman’s late last year and wrote a letter to the board in November. Privet’s attempts to get active obviously didn’t go well because they started dumping their shares on March 31 and it appears they sold their final chunk last week. NROM is a small ($13 million market cap) illiquid stock so three million shares hitting the market affected the stock in a big way. The day before Privet started selling, NROM was at $0.88. When Privet sold the rest of their shares last week, the stock bottomed out at $0.47.
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Xpel Technologies Part 1: Company Overview

Xpel Technologies (DAP.U, $1.05) sells paint protection film that goes on the front of cars to protect them mainly from rock chips. Paint protection film is a clear and very thin polyurethane-based material that is virtually invisible once installed. From Q4 2011 to Q1 2015, they recorded an incredible 14 consecutive quarters of at least 50% revenue growth (almost all organic). Not surprisingly, Mr. Market thought very highly of this growth and Xpel’s stock was often priced around 40-50x earnings. Inevitably that growth slowed down the past few quarters (although it remains over 30%) and the stock took a beating as a result. To top it off, on December 30th 3M (who owns one of their competitors) filed a patent infringement case against Xpel and the stock dropped another 50% on New Year’s Eve alone. It’s traded in that ballpark since. There’s a lot to say about Xpel so I’m breaking it up into two posts. This post covers all the main stuff (business overview, competition,  management, etc) and then part two will review the lawsuit.
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Zoom Is Zooming Into Massive Growth

Zoom Telephonics (ZMTP, $1.73) is a microcap that is about to experience explosive growth. In 2015 they did $10.8 million in revenue and their 2016 goal is to do between $50 and $100 million. This ramp up is due to a large contract win they announced last April with Motorola. The stock is up around 800% since then! But if management hits its projections, Zoom’s stock could have a lot more gas left in the tank.

Business overview

Not counting the Motorola deal, Zoom mostly sells low-end modems and modem/router combinations (but not routers). They sell modems for cable Internet, DSL, and even 56k. Never would I think that in 2016 I’d be researching two companies that still deal in dial-up Internet. Maybe Sitestar and Zoom need to get together and see who’s legacy dial-up business is shittier.
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What Is Sitestar Worth? Part 1

I’m betting Sitestar (SYTE, $0.0465) is a familiar name to those of you who follow the microcap space. For those who don’t recognize it, I’ll do a quick catch-up. Sitestar started getting attention in 2011 when Jeff Moore (aka Ragnar Is A Pirate) began writing about them and continued updating readers up until June 2014 when he started some activism. If what I write piques your interest, I highly recommend reading through his many posts for an educational and entertaining look at his past 4.5 years of involvement in this company.
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GlobalSCAPE Inc and Why SaaS Kicks Ass

I’ve been looking at several SaaS (software-as-a-service) companies as of late. In laymen’s terms, SaaS is software that is hosted by the providing company and the customer pays a regular subscription fee to use it (as opposed to purchasing the software up front for a one-time fee and hosting the software themselves). If you were to write down a list of characteristics you seek in investments, I bet the typical SaaS company checks off most items on your list. GlobalSCAPE Inc (GSB, $4.10) is one such company that possesses the following:

  1. 95% gross margins
  2. Free cash flow margins around 15%
  3. Over 100% returns on capital
  4. Over 50% of revenue is recurring
  5. Good visibility into future revenue
  6. Little to no customer concentration (no one over 10% of revenues)

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Napco Security Technologies (NSSC)

Napco Security Technologies (NSSC, $5.56) is one of the companies I met with at the MicroCap Conference two weeks ago. At a quick glance, Napco appears to be a typical manufacturer with no competitive advantage and low margins, but there may be more to the story. They manufacture security products such as alarms, door locks and surveillance systems that are sold through a distributor network with schools being the major end user. They occasionally get large one-off projects like the $1.7 million dollar sale to Pepperdine University as part of the school’s larger security overhaul. As school shootings have become more common, schools will continue to beef up security. Just in 2015 there have been 52 school shootings (though six were suicides) with three of these considered mass shootings (four or more people shot). This provides a decent tailwind for Napco’s products.
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Oriental Watch: Deep Value at its Finest

Oriental Watch is a luxury watch retailer that owns stores in China, Hong Kong, Macau and Taiwan. The company’s stock is currently selling for HK$1.05 and my estimate of liquidation value is around HK$2.50-$3.00. Any company selling for 35-40% of liquidation value is bound to have its fair share of problems and Oriental Watch is no different. They were profitable as recently as 2014 but there are significant headwinds facing the Asian luxury watch segment. Thankfully the management team has already been making moves to cut expenses and return to profitability.

One note: they are listed on the Hong Kong Stock Exchange (symbol: 0398) and on the American pink sheets (ORWHF). Unless otherwise stated, all numbers in this write-up will be in Hong Kong Dollars (HK$). The conversion is currently HK$1.00 to US$0.13.

Business overview

While the majority of their stores are in China (68 out of 87), these stores are smaller and less important to the story than the thirteen locations in Hong Kong. The company’s two operating segments are Hong Kong and then China, Taiwan and Macau combined as one. For simplicity I’m going to refer to this second segment as China since only six stores total exist in Taiwan and Macau and they are all through joint ventures. The thirteen Hong Kong stores make up around 70% of revenue and are still profitable as opposed to the China stores dragging down the results.
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